MFA Submits Comment Letter to SEC in Response to Securities Lending Proposal
January 7, 2022
MFA submitted comments to the U.S. Securities and Exchange Commission (SEC) on its proposed securities lending rulemaking. In the letter, MFA raised strong objections to the SEC’s proposal to build a consolidated tape, commingling and reporting together securities lending activities of lenders, lending agents, and broker-dealers with broker-dealer client activities that take place in a prime brokerage or margin account.
MFA raised concerns that commingling Wholesale Market and Retail Market transactions will result in information that is misleading and not particularly useful to investors with respect to providing investors with actionable information about the prevailing rates and availability to borrow securities. At the same time, the transaction-by-transaction financing data even in anonymized form would provide the market with sufficiently detailed information to allow market participants to reconstruct and/or reverse-engineer investment and trading strategies, leading to situations similar to the GameStop and AMC market events.
MFA recommended the SEC make the following revisions to the Proposed Rule:
- The Commission Should Adopt a Final Rule Limited to Wholesale Securities Lending Activities, Providing Aggregate Data on an End-of-Day Basis. Focusing on the Wholesale Market would best capture the information that is most consistent with the rulemaking objectives outlined in Section 984(b) of the Dodd-Frank Act. This information is already partially collected by private data vendors today, and consists of true securities lending transactions, as opposed to the varied lending activities between prime brokers and their customers, such as stock loans made to facilitate customer short sale transactions.
- The Commission Should Require Dissemination of Aggregated Transaction Data, Including Aggregate Blended Rate Information, Rather Than Transaction-By-Transaction Data, on a Weekly Basis. Aggregate blended rate information that is disseminated on a weekly basis will be more useful information to investors without having adverse repercussions to other market segments. Similarly, aggregate trend information will better serve investors due to the non-fungible nature of the securities lending market. Investors do not negotiate each transaction over the course of the day, but rather review overarching contractual terms infrequently as well as fees or rebates periodically based on broad trends in the supply and demand for specific securities, the credit risk of the entities, and other general market conditions.
- The Commission Should Exclude Portfolio Holdings from Reporting and Dissemination Requirements as it Would Provide Misleading Information of Available Securities and Could Result in Harm to Investors. Requiring all securities in a portfolio eligible for lending to be reported would provide misleading information to the market and potentially put lenders and end-borrowers at risk. Lenders include pension funds, mutual funds, insurance companies and other institutional investors. While a lender’s portfolio holdings may be eligible securities for lending, they are unlikely to be “available to lend” at all times. Brokerage firms and other intermediaries who manage securities lending programs on behalf of lenders do so within contractually established guidelines set by the lenders. Simplistic measures of available supply will result in misleading information.
- The Commission Should Explicitly Require a Registered National Securities Association to Maintain Strict Confidentiality and Information Security Standards. The confidential and proprietary nature of the information that an RNSA is required to collect requires a heightened level of specified information security rather than simply a reference to policies and procedures as provided for in the Proposed Rule.
- The Commission Should Limit the Proposed Rule’s Scope to U.S. Securities and Adopt a Phased Implementation. On the former, applying the rule to all securities irrespective of the jurisdiction that principally regulates such offerings goes beyond what is intended by Section 984, and could result in market participants segregating their foreign lending activities so as to limit U.S. assertion of jurisdiction activities. On the latter, given the sweeping nature of the Proposed Rule, the costly operational requirements, and the potential for unintended consequences, a phased approach of reporting requirements and dissemination of data will ensure that market participants are provided with accurate information that decreases the likelihood of harm to markets.